Toward the End of the Soviet-Type Economy

Abstract

The rise of Mikhail Gorbachev to the top of the Soviet power structure in the mid-1980s triggered (perhaps coincided with) a series of reforms in the Soviet-type economies. These reforms caught the world by surprise. But the institutions of the Soviet-type economy are so loaded with disincentives and high transaction costs that they simply had, at some point in time, to generate pressures for changes from within the system. Some major observable circumstances that brought about those reforms were:

• (i) Loss of faith in the inevitability of socialism. The performance of capitalist economies has refuted the Marxist belief that socialism is a superior system, which will inevitably triumph over capitalism. Thus, the present value of the cost of “building” socialism increased relative to the people’s perception of the present value of promised future benefits.

• (ii) Loss of faith in the ability of the ruling elite to fulfill the terms of the implicit social contract with the people. All Soviet-type economies have been deteriorating, their leaders have failed to improve living standards, and pockets of unemployment have appeared in most of those countries.

• (iii) The younger generations in countries with Soviet-type economies are more pragmatic, better educated, and more aware of the quality of life in capitalist countries than those that grew up in the immediate post-revolutionary years. New generations have a much higher preference for current consumption over a hazy vision of things to come.

• (iv) The ruling elite in the Soviet-type economies has recognized that high rates of capital formation are not a guarantee of high rates of economic growth.